Electronic filing

The NC Department of Revenue has started sending out notices denying extensions that were timely filed. The notices demand the income tax return be filed within 30 days and threaten penalties and interest if tax is due. If you are due a refund, then there will be no penalty or interest due. Of course, there should be no late filing penalty for the extensions denied even if the taxpayer owes as long as the taxpayer or preparer has proof of timely mailing. There can still be interest and late payment penalties but that is because the extra tax was not paid with the extension.

Reason NC extensions denied

The NC Association of CPAs is reporting that several trays of certified mail were delayed in the Raleigh Post Office. Once the mail finally made it to the Department of Revenue they were so late that NC assumed they were mailed after the deadline. NC should have looked at the postmarks and determined which were filed timely. NC is working to correct their records.

What should taxpayers do?

If you filed on or before April 18, 2016, then this will not affect you.

If you filed an extension and do not receive a notice, then just wait. There is nothing to do except file your return timely.

If you filed an extension and receive a notice denying it, you need to reply. NC should fix this but you need to protect yourself by sending a response via certified or registered mail along with proof you filed your NC extension timely. Your proof of timely filing will be one of three things:

If you filed the extension on NC’s website, then you should have proof showing timely filing.

Certified Mail receipt addressed to the proper address for NC extensions and marked by the Post Office as received by the Post Office on or before April 18, 2016. If I filed your NC extension, this is the proof I have. Please send me the notice so I can get NC to update their records.

Registered Mail receipt addressed to the proper address for NC extensions and marked by the Post Office as received by the Post Office on or before April 18, 2016.

If you put a stamp on the extension, you are at the NC Department of Revenue’s mercy. They do not have to prove you did not file timely, you have to prove you did file the extension timely. Unfortunately, your word is not usually enough.

What we learned

Taxpayers need to send important tax documents Certified or Registered Mail or by means of an approved electronic method.

The NC Legislature, without much warning or lead time, changed the W-2 due date for NC employers. The old W-2 due date was the end of February. Now employers must send the the employer copy to the NC Department of Revenue by January 31, 2016. This W-2 due date change is also tied into a new mandatory electronic filing of W-2s effective for 2015 forms.

NC now requires Electronic Filing

The Legislature, as is true of most elected bodies, lacks many people with practical real world experience. On September 23, 2015, the Legislature passed H.B. 117 (PDF) requiring the new due date. But that was not enough for our Legislature, they decided to also require that all W-2s for 2015 be filed electronically. The only exceptions were for those employers requesting a hardship extension. Really? A little less than 3 1/2 months to get an entire new system setup.

For large employers and those using large payroll processing firms, the electronic requirement is no big deal. They had already invested in software for electronically filing W-2s. Their adjustment is to the new due date only. Smaller employers did not often have the capability to electronically file W-2s with NC. In addition, many of the payroll software vendors catering to small businesses did not have this capability. Even last year I saw handwritten W-2s from some small employers. The Legislature’s solution was to require the NC Department of Revenue to provide an online filing process.

Just this Monday (January 25th) , the NC Department of Revenue finished their programming to allow a simple method for electronically filing W-2s. Fortunately, the Department exercised its authority to grant hardship waivers without making employers apply. You can see their notice here. Basically, small employers can still file paper W-2s for 2015. Find more information on NC electronic filing here.

2015 W-2 form

NC W-2 Due Date change

NC employers had until the end of February 2015 to file W-2s with NC. This would allow employers to provide the W-2s to their employees by the end of January. Then if an employee had needed a correction, the employer had time. For example, if the Social Security Number, the employee’s name or address were wrong things could be fixed before the forms went to the government. No such option now.

Reason for the change

The stated reason is to help prevent identity theft. If NC is able to match the electronically filed W-2s to the individual returns before issuing a refund this should help a lot with identity theft. Considering the short time the Legislature gave to the Department of Revenue, I expect there will be problems this year.

Future Federal W-2 due date change

In December, Congress changed the due dates for 2016 W-2 forms due in early 2017. Congress also made the change to combat identity theft. At least Congress is giving employers time to adjust. The employer will have to file 2016 and future W-2s by the end of the following January. In years past employers who electronically transmitted forms W-2s received an extra month to file them with the government. Instead of the general end of February W-2 due date, electronic filers had until the end of March. No more!

Conclusion

Employers need to adjust their payroll processes to comply with the new due dates. Late filers will owe penalties. NC charges $50 per late W-2. IRS charges up to $100 per W-2 for 2015 W-2s and up to $260 for 2016 W-2s. Penalties are just money down the drain. Taxpayers cannot even deduct the penalty to reduce their income taxes.

Tax Season to Start on Time

On December 29th, 2014 IRS announced that they expect tax season to start on time. Congress passed the 2014 tax extenders act in time for IRS to meet its originally planned start date of January 20, 2015. Both electronic and paper returns will be accepted beginning then. Some taxpayers may still have to wait if they have special situations that software vendors are still programming into tax preparation software.

President signs Tax Extenders Act

While we were away for the holidays, President Obama signed the 2014 tax extenders act on December 19th. The act is formally known as the Tax Increase Prevention Act of 2014 and is also known as H.R. 5771 which is how the press release in the prior link refers to it.

Budget cuts may still affect tax season

Politico and other news media reported IRS Commissioner Koskinen warned that the IRS may “have to shut the place down” due to the cuts to IRS’ budget made in the recently passed spending bill. They also report that Koskinen ordered a suspension of overtime and a hiring freeze. While Congress is punishing IRS with budget cuts, they are also penalizing innocent taxpayers for the wrongs committed by IRS. For more on the budget cuts, read Joe Kristan, CPA’s post – “If you think I’m unsympathetic to Commissioner Koskinen’s pleas of IRS poverty ….”

Hopefully, these changes will not delay refunds during tax season and beyond.

NEW* – I am having second thoughts about this post. It looks like IRS only requires photo IDs when the taxpayer(s) electronically sign (e.g. a signature pad) and not when their signature(s) are handwritten. Hopefully, IRS will clarify the publication.

Essentially, at the end of April 2014 IRS revised the handbook to require tax professionals to check a government issues photo IDs for all in-person electronic filing and recommends we run a credit check or similar verification.

For remote clients we must “Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases.”

No more taking the form home for your spouse to sign, we have to see them and their government issued photo ID. As both Mr. Fox and Mr. Kristan note, the easiest solution is to have the taxpayer to elect out of electronic filing.